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20
September 2016
Listing
budget targets, private investment and bank liabilities as the main challenges
for India, Moody's has projected India's gross value added (GVA) growth to rise
to 7.7% this fiscal with mixed trend in inflation. The Total Investment & Insurance Solutions
At
a press conference here, Marie Diron, Senior Vice President with Moody's
Sovereign Group, saw India's credit rating materialising in the medium term
based on reforms, which could potentially stabilise the macro-economic
environment that is conducive to fiscal consolidation.
"In
the nearer term, challenging budget targets could lead to significant spending
cuts late in the fiscal, especially since in the first four months of the
fiscal year, 74% of the whole year's budget target has already been
reached," Moody's Investors Service said.
Besides
Diron, the press conference was addressed by Aditi Nayar, Senior Economist with
ICRA, an affiliate of Moody's in India, who expected the country's
growth-inflation dynamics to display mixed trends during the current fiscal. The Total Investment & Insurance Solutions
"Specifically,
growth of GVA (gross value added) at basic prices is set to improve to 7.7%
from 7.2% in FY2016 on the back of domestic consumption demand, amid a
hardening of CPI inflation to an average of 5.1% from 4.9% over the same
period," she added.
Gross
value added as opposed to gross domestic product is considered a better measure
of economic performance as it excludes taxes and subsidies while calculating a
country's output.
According
to Moody's, some measures, if effectively implemented, can push India's growth,
notably an easing of restrictions on foreign direct investment to foster
productivity, bankruptcy law for enhancing investor confidence and measures
aimed at ease of doing business.
"However,
these reforms will ease rather than remove some of the hurdles to robust and
sustained investment, and therefore growth in India. In the nearer term,
private investment will remain weak as corporates in investment-intensive
sectors are burdened by elevated debt," it said. The Total Investment & Insurance Solutions
The
economy will also remain vulnerable to monsoon rains due to partial crop
irrigation and slow progress in creating food storage and transport
infrastructure. Infrastructure will continue to constrain investment, and
foreign investment can't make up domestic investment, it added.
"Structural
hurdles will continue to constrain private sector investment and growth, and
banking sector will continue to pose contingent liability risks to the
government over the near to medium term," it said. The Total Investment & Insurance Solutions
The
agency advocated a multi-pronged, but step-wise approach, to reforms to ensure
stable, robust growth, moderate inflation and narrower budget deficits. It also
expected the monetary policy to focus on containing inflation, and said this
was a credit positive for India.
"In
terms of the monetary policy framework, the Government of India has notified
retail inflation target of 4%, within a tolerance band of 2%-6% until March
2021. Such a scenario would help to anchor inflationary expectations,"
said Diron. The Total Investment & Insurance
Solutions
Speaking
about the shift to a pan-India goods and service tax regime, Moody's said this
will only enhance revenue collection for the government over time, through
better tax compliance and higher profits, as businesses save on tax
administration costs.
The
agency said banking sector risk will also remain a constraint on India's
sovereign ratings.
"While
bad asset recognition is a first step, the measure does not strengthen the
resilience of banks, and therefore does not reduce the contingent liability
risks for the sovereign," it said in a statement issued at the conference. The Total Investment & Insurance Solutions
"Moody's
estimates that fiscal costs of equity injections in public sector banks are
manageable, although they are larger than currently budgeted and will add to
the government's challenge in meeting its fiscal targets."The Total Investment & Insurance Solutions
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